Quick overview

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The cost of protection against fluctuations in sterling reached a seven-month high.

Overnight volatility versus the euro surged to the highest level since mid-April on an intraday basis and is at the strongest closing level since June 2023 as traders prepare for short-term price swings.

Options are now trading at the largest premium to realized swings in three years compared to recent market activity, indicating that hedges are significantly overpriced. UK risk is mainly transferred through the euro by avoiding the US macro influence on the pound-dollar exchange rate.

However, according to data from the Depository Trust and Clearing Corporation, positioning has leaned towards being pound-bearish this month vs both the common currency and the US dollar. Traders are not positioning for an outsized move, despite not taking any chances with the Autumn Budget.

While remaining close to the year-to-date average versus the euro, demand for structures that payout if the UK currency breaks out of its recent ranges versus the dollar fell on Monday to the lowest level since June. Except for the September 2022 mini-budget, budget days have seldom been significant volatility events, which partially explains historical trends.

The average daily movement of the pound against the dollar since 2017 has been 0.5 percent, and the volatility of overnight cable generally aligns with that average.